CRUDE OIL'S STALL SPELLS BAD NEWS

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DAVID MORRISON<br /><strong>CFD MARKET STRATEGIST, GFT</strong><br /><br />DESPITE assurances to the contrary, the US administration wants a weaker dollar. Investors have seen this, however, and discount US Treasury Secretary Tim Geithner&rsquo;s call for a strong dollar as simply hot air. Meanwhile the clear message from the Federal Open Market Committee (FOMC) is that US interest rates will stay exceptionally low for an extended period. <br /><br />These sentiments have supported the price rise in risk assets. Equities, precious metals and oil all moved higher as traders saw recent developments as a green light to continue with the dollar carry trade &ndash; selling &ldquo;no yield&rdquo; dollars in return for anything else that may give a return. <br /><br />In addition, the US budget deficit ($176bn in the last month alone, and maybe just a few weeks away from hitting its ceiling of $2.1 trillion) has to be funded, and this requires a stunning amount of Treasury debt issuance. In this scenario the outlook for the dollar looks grim. But the US administration is betting that as long as the greenback&rsquo;s decline is steady and orderly, it will help their economy to rebalance: imports slow, exports grow and inflation gradually takes care of the liabilities.<br /><br /><strong>STRUGGLING OIL</strong><br />So with the dollar all set up for a slow and protracted decline, we should continue to see further rises in equities, gold and crude oil. But crude appears to be stuck. Gold hit a new record high last week, yet oil is still struggling to push above $80 &ndash; well below its near-$150 per barrel record hit last year. Why might this be?<br /><br />While there may well have been some speculative froth around that 2008 high, that wasn&rsquo;t the only reason for the strength. Back then, oil was talked of as the major dollar alternative &ndash; the fact that it was difficult to store was offset by its economic and strategic importance. <br /><br />Could it be that the rally in gold combined with the abrupt halt in crude&rsquo;s advance is telling us something important? In my opinion, I think it is telling us that our economic prospects are dire. Gold is rising as investors lose their faith in all currencies &ndash; not just the dollar; but oil has stagnated because it just doesn&rsquo;t believe in the recovery.<br />